Mr Khalaf's anger with New Zealand, after it cancelled live sheep exports in 2004, was described in Cabinet documents made public this week as a major threat to the country's economic interests.

As part of the deal to try to placate the Saudi businessman, who was furious that he had lost many millions of dollars, 900 sheep were flown to his farm in the Saudi Arabian desert.

Green MP James Shaw said the Government had done an unethical and dodgy deal.

"What we seem to be doing is taking taxpayer money, giving it wholesale to the Al-Khalaf group for their private business in Saudi Arabia in order to have him stop resisting the trade deal," he said.

"They're essentially buying off Mr Al-Khalaf."

Foreign Affairs Minister Murray McCully Photo: RNZI / Jamie Tahana

Labour's David Parker said the money poured into Mr Khalaf's farm was simply a bribe.

"This idea that because you have a disaffected businessman you should pay him up to $4 million, plus $6 million for a model farm on his property, in order to buy his support for a free trade agreement with Saudi Arabia is corrupt."

Foreign Affairs Minister Murray McCully said the former Labour Government had poisoned the relationship between New Zealand and the Gulf States.

"The New Zealand Government was also exposed to a legal claim of up to $30 million."

"This is another part of the giant lie. There is nothing illegal about New Zealand having a ban on the export of live sheep for slaughter, indeed the current Government has continued with that ban."

The Air Force 757 that carried the Prime Minister's entourage on his recent trip to the Gulf States in Riyadh. Photo: RNZ / Kim Baker Wilson

Prime Minister John Key said the deal had led to a practical and pragmatic outcome.

"The lawsuit that the gentleman might have taken had nothing to do with the FTA [free trade agreement]. It was totally about what he believed were the assurances made to him by previous governments and whether he would lose money.

"A factor that might help us is that we might also get an FTA, but it was just one factor, there was no guarantee.

"When we did this deal we didn't say 'this will get us a deal', it was just one of the factors that was there."

Mr Khalaf is also a stakeholder in Hawke's Bay company Brownrigg Agriculture, which won the Government contract to deliver the goods and services to his own Saudi farm.